Weekly Review- Dollar fails to push on

Forex Update

The surprise of the week was the Federal Reserves decision to raise the discount rate by 25 basis points to .75 %. This was of not a signal of Fed tightening but merely targeting the supply of reserves.
After an initial Knee Jerk stronger the dollar ended the week close to where it began. However, it may reinforce the growing view that the US is further advanced on the recovery road and thus the Fed will be the first to exit from stimulus measures.Markets are predicting some tightening by the Fed in the Autumn but some commentators are now predicting this may be earlier. The yen suffered particularly losing ground not only against the commodity currencies but also the Euro.

The long dollar and short Euro positions held by the currency markets seem to be stalling any further moves at the moment. A more corrective phase may ensue and perhaps some dollar bulls and euro bears will have to be squeezed out of positions before we see an assault on the lower 1.30s. It is quite possible we will see the Euro back at 1.40 against the dollar and nearer 130 against Yen before any further weakness.

The situation in Greece seems to have slipped to the back burner and may add to that corrective phase. However, this problem together with the other PIGS will run and run. Greece has major problems persuading its public to accept the budget cuts required. Although 70 % of the public appear to back the government many different factions appear not to want to bear their share. Ireland which is now held up as some example of facing up to its responsibilities, has a long long way to go.In general the Euro area growth will remain very sluggish merely exacerbating the deficit problems.If governments are forced to turn off the stimulus taps then we could see some real anxiety and likely the beginnings of even greater social unrest in some countries.

The UK statistics were all very disappointing. A first January deficit for PSBR (-GBP 4.3 Billion as apposed to expected -2.4 billion). Retail sales dropped 1.2 % in January and the CPI hit a whopping 3.5 %.
Sterling has not benefited from any of the recent Euro weakness. While the rating agencies are engaging in a wait and see what the election brings approach,the outlook for the pound remains vulnerable.
Indeed it is not difficult to envisage a scenario further ahead of another crisis for the pound.
Talk of tough action on the deficit is not good Electioneering and Gordon Brown in particular seems convinced that he can go on spending until the UK grows out of its problems.As I mentioned last week the mumblings of a possible hung parliament are growing. That leads to uncertainty as the UK has never faced that before and that could well add to the pounds woes.

The key for the coming weeks may well be the performance of the stock markets. A little spooked by the Fed the US markets are still hanging on to some big physiological levels. If we were to see further weakness in the Dow and S&P under the 10,000 and 1000 levels then things could get nasty and the dollar and yen could swing back into favour.However , as I mentioned in the short term it maybe these 2 currencies which suffer from a Euro pullback in the foreign exchange markets.